Living in China's Shadow

Takeaways

Latin America’s bilateral relationship with China can be best described as shallow, but expanding. Total trade between the two parties, for instance, rose ten-fold between 1993 and 2001.

Still, the total trade volume — at just $13.5 billion in 2001 — was only slightly ahead of China’s total trade with Africa. Not surprisingly, trade flows favor China — with the mainland posting a $1.9 billion trade surplus with Latin America in 2001.

Investment linkages between Latin America and China are in their infancy as well.

However, this deeper form of economic integration is gradually becoming more prevalent, notably between China and the region’s top economic players.

Chinese firms are increasingly staking out investment positions in Mexico, complementing their budding investment stakes in the United States.

In Brazil, some 50 Chinese firms have direct investments in the country, according to government figures. These investments are aimed at such sectors as forestry, food processing, transportation and light industry. Brazil’s investment in China continues to expand as well.

Indeed, Brazilian-China investment ties were given a significant boost with the recently announced joint venture between Embraer, the Brazilian aircraft manufacturer, and the China Aviation Industry Corporation II.

That China is a significant exporter of capital is not well-known. But Chinese firms have been aggressively investing overseas for the past decade.

Indeed, China’s outward foreign direct investment as a percentage of GDP rose to 2.4% in 2000 — from just 0.7% in 1990. A large share of this investment has been directed at natural resource projects in Southeast Asia and Central Asia.

China’s top 12 multinationals — according to figures from the United Nations — now control over $30 billion in foreign assets and employ over 20,000 foreign employees. They generated $33 billion in foreign sales in 2001. Most of these firms are state-owned, although large, privately-held Chinese firms are now moving abroad as well.

The task for Latin America is to attract the investment of such leading firms as China National Offshore Oil Corporation, China State Construction Engineering Corporation — and Haier Group Corporation.

The latter company, one of the world’s largest manufacturers of refrigerators, now operates a plant in South Carolina.

Moving up the value chain — that is, producing more value-added goods — is another challenge for Latin America. Most manufacturers have no other choice.

For many Caribbean manufacturers, for instance, competing against China in low value-added industries like textiles is only going to become harder given China’s rock-bottom wages and the removal of global textile restrictions over the next few years.

Mexico, meanwhile, increasingly finds itself going head-to-head against China in a number of industries, such as apparel, electronics and furniture.

With Mexican hourly labor costs four times higher than those in China, foreign investors are shifting production in low-value, high-volume goods like mobile phones, handbags and other goods away from Mexico — and to China.

A final challenge for the region is to accelerate the development and competitiveness of those sectors where Latin America does not compete head-to-head with China.

Manufacturing low-end, high-volume goods looks less and less viable for many countries in Latin America — given China’s rising status as the “factory of the world.”

China’s manufacturing capabilities are advancing so rapidly that even traditional manufacturing powerhouses — like Germany and Japan — are finding it increasingly difficult to compete with the mainland.

Countering China’s preponderance in manufacturing means that Latin America must boost the competitiveness of its agricultural sector, raise productivity levels in such key primary sectors as mining and fishing — and promote growth in such critical service activities as tourism.

Increasing the value-added of all of these activities requires foreign direct investment, suggesting that Latin America should be less concerned about attracting manufacturing investment as opposed to investment in agriculture, mining and service-related activities.

Now more than ever before, the key challenge for Latin America is to leverage its competitive endowments in these sectors so as to counterbalance China’s rising claim on global manufacturing.

All of that is why it is time for Latin America to elevate the mainland to the same level as the United States and Europe when it comes to setting foreign strategic priorities and policies.

Latin America must increasingly look west towards Asia in general — and China in particular.

In so far as Latin America remains dependent on foreign capital and foreign markets — with the United States and Europe the principal suppliers of both — China represents a viable alternative to both. The country is a significant capital exporter, with international reserves in excess of $300 billion.

It is also a massive market for foreign goods. At a minimum, then, China is a third destination from which Latin American can draw capital — or export goods to.

Yet, gaining the attention of China will not be easy for most nations of Latin America. Lacking economic and political cohesion, Latin America does not speak with one voice — but with many.

Likewise, more fragmented than united, Latin America’s economies do not offer the economies of scale of a single market. That factor has deterred corporate China from making large-scale investments in the region.

Greater regional integration in Latin America would help promote greater diplomatic dialogue and economic ties with China. However, attempts at bringing the region closer together have lost momentum over the past few years due to financial and political stress.

For China, Latin America could potentially be a ripe and ready region for greater Chinese influence, both in diplomatic and economic terms.

It’s no secret that from Mexico to Argentina, Latin America’s leadership has grown increasingly disillusioned with a Bush Administration pre-occupied with the Middle East — and bent on tightening border controls closer to home.

The European Union, meanwhile, has been too busy drafting a new constitution and expanding eastward to give the region much strategic thought or impetus as of late. Japan’s presence in Latin America remains nominal at best.

All of the above factors leave the door ajar for China to expand its influence in Latin America. Many believe Beijing is not interested — yet this consensus view could be wrong.

Interestingly, if Beijing does have grand designs to balance the global reach and influence of the United States, what better place to play the role of global neutralizer than right in America’s backyard?

In the end, China is too big to be ignored.

But rather than fear the mainland’s emergence, Latin America should embrace and seize upon the opportunities presented by China’s integration into the world economy.

China should be viewed as a new source of capital — and as a new source of demand — for the region.